BANK

DEFINITION
R N CHAUDHARY
"Bank is a banking company which trades in money."
BRITANNICA
"An institution that deals in money and its substitutes and provides other money-related
services."

BANKING
DEFINITION

Banking Regulation Act, 1949

Section 5 (b)

 "Acceptability of deposits of money from public

 For the purpose of lending or investment
 Repayable on demand or otherwise
 Withdrawable by cheque, draft, order or otherwise." [Section – 5(b)]
Whatever Bank does is Banking.

BANKING COMPANY
DEFINITION
Banking Regulation Act

Section 5 (b), 5 (c)

"Any company which transacts the business of banking in India."

Conditions
 Accept deposit
 Purpose lending or investment
 Repayable on demand or otherwise
 Withdrawable by cheque etc.
 Institution must be a company as defined U/S 3 of Companies Act, 1956

DEVELOPMENT OF BANKING
IN INDIA
INTRODUCTION
The word “Bank” is derived from an Italian word “Banco” which means “a bench”, on
which money changers sat and did their business in ancient days.
WORD ORIGIN
o Italian word “banco” meaning bench
o Medieval times
 Money lenders/ Money changers did business on bench
 Money changing was the most important function of banks in that period
EARLY HISTORY
o Temples
 Babylonian Temples
 Delphi Temple of Greece
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 o Edward III reign
 Exchange
 British Money to Foreign Coins
 By Royal Exchanger
o Ground of modern banking
 Elizabeth reign
 Gold Influx from America
 City merchants deposit money to gold smiths
 Against signed ‘gold smith notes’
 Foundation of ‘deposit’ ’issue’ banking
HISTORY IN INDIA
o Banking provisions found in Kautilya’a Arthashastra, Gautama, Brihaspati,
Budhayana
o Occidental banking
 Started by Agency Houses
 In addition to banking –Speculative transactions- Agency houses Failed
 Speculative – purchase asset- risk of losing/ hope of gaining in future
 Govind Vs Ramnath
Bombay High Court criticised it- Ordered closure of Speculative
transactions
 This separation gave stability to banking business
o Presidency Banks
 Bank of Bengal 1806
 Bank of Bombay 1840
 Bank of Madras 1843
 Amalgamated into Imperial Bank of India – by SBI Act 1955
 Taken over by newly constituted SBI
o Swadeshi Movement
 Prompted Indians
 Bank Of Baroda
 Canara Bank
 Bank of India
 Indian Bank
 Central Bank of India
o Need of Central Bank
 RBI 1935
 Took government transactions from Imperial Bank

NATIONALISATION
o Banking Companies (Acquisition and Transfer of Undertaking) Act
o 1969 14 Banks
o 1980 6 more Banks
o Managed by Government of India through appointed Board of Directors
o RRBs- 1975
o NABARD, IDBI- Distinct banking activities
o Indian banking institutions imitating fineness of Foreign banks
o Diversification, Technological advancements ,Healthy Competition

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CUSTOMER
Person can become a customer
o Open account in bank-
o Start transaction i.e. first transaction takes place
If a person does not have account but makes casual transaction through bank – Not customer

"A customer is a person who has some sort of account, either deposit or current account or some similar
relations with a bank. From this, it follows that any person may become a customer by opening a deposit
or current account or similar relation with a bank".
RELATIONSHIP BETWEEN CUSTOMER AND BANKER
Banker-Customer Relationship:
The main relationship between bank and a customer is that of debtor -creditor in the case of deposit
account and creditor-debtor in the case of overdraft or loan account. The bank acts trustee in case of
valuables entrusted with the bank branch and as agent or bailee in other kinds of transactions. These kinds
of relationships enjoin different rights and duties on the bank, involving different degrees of care and
diligence as below: The Relationship between banker and customer can be in the form of
1. Debtor – Creditor
2. Trustee - Beneficiary
3. Agent - Principal
4. Bailor - Bailee
5. Assignor - Assignee
2.1 Debtor-Creditor
A debtor is an entity that owes a debt to another entity. The entity may be an individual, a firm, a
government, a company or other legal person. The counterparty a creditor. When the counterpart of this
debt arrangement is a bank, the debtor is more often referred to as a borrower.
a) Bank as debtor: The principal relationship of bank-customer is that of debtor-creditor in case of deposit
accounts like Savings Bank account, Current account, Fixed Deposit account and Recurring Deposit
account.
b) Bank as creditor: The relationship between bank-customer becomes that of creditor-debtor, when
customer has borrowed money from the bank by way of OD(Overdraft), CC(Cash credit), Demand loan,
Term loan, Bills discount or any other kind of loan or advance, either on secured or unsecured basis.
Trustee – Beneficiary
Trustee is an individual who is responsible for a property or an organization on behalf of some other
individual or a third party. Trustee is supposed to make profitable decision for the entity under it
authorization. It is a legal relationship between the trustee and the party, where the trustee is totally
responsible for the maintenance, performance, and profitability of the trust under his guidance.
A beneficiary is any person who gains an advantage and/or profits from something. This relation works out
when the,
 Customer deposits money for a specific purpose, the banker is a trustee and the customer beneficiary. As
such, the banker has to employ the funds for a specific purpose for which it is meant.
 Banker becomes a trustee whenever he undertakes to collect cheques on behalf of customers. After
realizing, banker has to credit the proceeds to the account of the customer. When the amount is credited
to the account of the customer, the relationship changes wherein the banker becomes a debtor and the
customer creditor.
 Customer deposits securities and valuables for safe custody with the banker. The banker in such a case is
a trustee and so, whenever the customer demands the securities, the banker has to return them to the
customer who is a beneficiary.
 In the case of companies, when they receive debenture amount from the public, the banker acts as one
of the trustees of the company and so has a responsibility to review the value of the assets against which
the debentures are issued. Hence, the banker has a responsibility to supervise the property of the
company for which he is a trustee.

Agent – Principal
An agent is a person who acts for or represents another. The principal is the person who gives authority to
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another, called an agent, to act on his or her behalf.
Banker acts as an agent of a customer, when
 Purchasing and selling securities on behalf of the customers
 Collecting dividend warrants and interest warrants
 Paying club subscription, insurance premium, rent and other bills, as per instruction of the customer
Here again, the relationship cannot be called in the true sense as agent - principal. In the case of a
normal agent-principal relationship, the agent has to render accounts to the principal and should also
inform the principal how the amount given to him by the principal has been spent or invested. In other
words, the agent has to render accounts to the principal while dealing with the funds of the principal.
However in the case of a banker- customer relationship, though the banker is dealing with the
money belonging to the customer, he need not render accounts to the customer or inform the customer as
to how the money is lent or invested. Though the money invested or lent, belong to the customers the
banker need not tell them the extent of profit or return he made from such investment or loan. But in the
case of normal agent- principal relationship, it is the duty of the agent to render accounts to the principal
and also inform the return earned on the investment. Thus, though a banker may act as an agent of
customer, in the true legal sense, he is not an agent and so he need not render account for the money
deposited with him.
Bailor – Bailee
A bailor is a person who entrusts a piece of his or her property to another person (the bailee). A bailee
does not have ownership of the property.
When a customer borrows from a bank against the security under pledge, the bank is regarded not
only a pledgee but also a bailee and so the bank has to take care of the security until it is returned to the
customer. But the goods kept in the safe deposit vault will not come under bailment. The customer is
keeping the goods in the safe deposit vault secretly and hence the banker will not be a bailee. As a bailee,
the goods coming into his custody will be protected and the banker is totally aware of the nature of the
goods. Thus, the banker will act as a bailee only when goods are entrusted to him for a specific purpose.
Any expenses incurred towards maintenance of the security or goods have to be borne by the customer.

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SERVICES/FUNCTIONS OF BANK
A. Primary/ Essential/ Main
B. Subsidiary
C. Miscellaneous

PRIMARY

1. Accepting Deposit
a. Lifeline of banks
b. Basis for other activities
c. Account types- Term Deposit- Fixed deposit, Recurring Deposit, Savings Deposit
1. Demand Deposit- Current Deposit (everyday payment)
2. Lending of Money
a. Source of profit
b. Loan, advances, overdraft facility
3. Cheque
a. Cheque issuance- Exclusive right of banks
4. Remittance of Funds
a. Send money to another party
b. CBS, Draft

SUBSIDIARY

1. Agency Services
a. Bank acts as an agent of customer
b. Buy/Sell- Shares, Stocks
c. Collect- Dividend, Bonus
i. Cheque, Promissory Notes
d. Remit funds on behalf of client
e. Acting as – Trustee, executor, correspondent, valuer, auctioneer, administrator
f. Payment- Taxes, Bills, Insurance Premium
2. General Utility Services
a. Account opening , maintaining, loan, locker, credit card, share, bond, remittance,
cheque, business info, financial advice, trustee, custodian, executor
3. International Banking Services
a. Remittances, Finance International Companies
4. Merchant Banking Services
a. Leasing, Housing Finance Venture, Capital Service, Financial Services
5. Para Banking Services
a. Insurance Business, Credit Card Business
b. Separate Department or setup Subsidiarry
6. Foreign Exchange Services
a. Assist Importers and Exporters
b. Documentation, Letter of Credit Issue, Loans, Term finance- post shipment, Export
promotion measures
MISCELLANEOUS
 Custody of valuables, Tax consultancy, Cheque collection etc.

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 BANKER’S LIEN
LIEN
 Right of Possession of property, goods
 For due payment

Under Indian Contract Act, its a right , instead of a contract.

TYPES-
a. Particular – Property possessed is connected to due payment
b. General- Property possessed might not have connection to due payment

BANKER’S LIEN
o Implied Pledge
o Banker has right to sell the property – after reasonable notice

APPLICABLE

a. Property in control of bank

b. Not for particular purpose, inconsistent with lien
c. Lien on goods coming into the hand of the banker in his capacity as a banker
d. Possession obtained lawfully as banker
e. No agreement(Express/Implied) contrary to lien
f. Lien on fixed deposit
g. Lien on life insurance pplicy
h. Lien on cheque, bills, etc deposited from collection
i. Lien on interest dividend coupons deposited from collection
j. Lien on specific securities left with him after the repayment of the specific loan
k. Lien on the surplus sale proceeds of security
l. Lien in respect of time barred debts

NOT APPLICABLE

a. Deposited for safe custody

b. Safe deposit locker
c. Negotiable instrument entrusted to him for special purpose
d. Money deposited for special purpose
e. No lien on securities obtained by force
f. No lien on security left with him inadvertently.
g. No lien on securities left to cover a loan which in not granted
h. Left with him unknowingly
i. Trust Account
j. Securities left with bank after repayment of loan
k. No lien o securities received for sale
l. No lien on a fixed deposit receipt which has not been endorsed and discharged on
maturity.
m. No lien on bonds when the customer separates the coupon from the bonds
n. No lien in respect of contingent debt.

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RIGHTS OF BANKER
Right of set-off
A debtor can recover any debt due from a creditor before settlement of debt with the
creditor. This is called “Right of set-off”
 When a bank accepts deposit from customer, he is a Debtor
 When a bank lends money to the customer, the banker is a creditor and
customer becomes Debtor.
 In this situation, if the customer approaches the bank for closing his deposit
account, the bank will allow the customer to close the account only after
recovering the loan taken by the customer, from his deposit money
Three conditions are to be fulfilled to exercise right of set-off

a) The same customer should have the deposit account and loan account
b) The loan must be outstanding and overdue when the loan amount is not
overdue, the right of set-off can not be exercised.
c) There should not be any agreement between the banker and customer, by which
the banker is prevented from exercising right of set-off.
Right of set-off can be exercised when a partner’s individual account has a credit balance and
the firm’s account has a debit balance, due to loan taken from bank. But vice-versa can not
be done.

Right of Lien
Lien is a right of a banker, by which he can retain any security coming to his
possession for the purpose of any loan due by customer.
Banker's right of general lien
One of the important rights enjoyed by a banker is the right of general lien. Lien means
the right of the creditor to retain goods and securities owned by the debtor until the debt due
from him is paid. It may either be general or particular. Bankers most undoubtedly have a general
lien on all securities deposited with them as bankers unless there is an express or implied contract
inconsistent with lien. In India sec 171 of the Indian Contract Act confers general lien upon
bankers as follows - Bankers may in absence of a contract to the contrary, retain as security for a
general balance of account, any goods bailed to them.

Circumstances for exercising general lien

1) No agreement inconsistent with the right of lien.
2) Property must be possessed in his capacity as a banker.
3) Possession should be lawfully obtained.
4) Property should not be entrusted to the banker for a specific purpose.
Incidents of lien- lien attaches to
1) Bills of exchange or cheques deposited for collection or pending discount.
2) Dividend warrants and interest warrants paid to the banker under mandates

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 issued by the customer.
3) Securities deposited to secure specific loan but left in banker's hand after loan is repaid.
4) Securities, negotiable or not, which the banker has purchased or taken up, at the
request of customer, for the amount paid.
Exceptions- banker has no general lien
1) On safe custody deposits.
2) On securities or bills of exchange entrusted for specific purpose.
3) On articles left by mistake or negligence.
4) On deposit account.
5) On stolen bond.
6) Until due date of the loan.
7) On trust account.
8) On title deeds of immovable properties.

Right of appropriation: is a right exercised by a creditor upon his debtor for the
purpose of setting loan account. Sec. 59 to 61 of the Indian contract Act deal with the
provisions of the right of appropriation of payments.
In right of appropriation, we find how a debtor who has three or four debit
account settler by making payments to the credits.
Condition Applying:
a) When making payment to a creditors debtor has right to inform the creditor, that
as towards which loan he is making. (Sect 59).
b) When a debtor has not exercised his right, the creditor has the right to
appropriate the payment made by debtor towards any loan, according to his
discrete (sec. 60).
c) When neither the debtor nor the creditor exercises their right for appropriation,
then it is the chronological order in which the debit entries have arisen, the
credit entries will go to discharge the debit entries.
3.2 Right to charge, interest, commission and brokerage
A banker grants loan and advances to customers and charges interest on the same
banker usually debit the customer’s account when the customer fails to pay the interest amount
every month. After three months the interest will be added to the principal amount. Interest will
be then charged on the new principal amount.
 Similarly for collecting cheques, dividends and interest warrants, the
banker can commission and brokerage charges
3.3 Right to close the account of undesirable customer
Undesireable customer is one who has been frequently issuing cheques which are
bouncing or which are getting dishonoured. Due to this, the reputation of the banker is affected.
In such situation, the banker after giving due notice to the customer, can close the
account.

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 DUTIES OF A BANKER
4.1 Duty to honour cheque
It is the duty of the banker to honour cheque of customer which are drawn properly and
presented during the working hours of the bank.
However the Bank has the right to dishonour the cheques under the following situations
Date
 Post dated - a date yet to come
 Stale - more than 3 months

Post dated cheques are those which carry a date which is yet to come. If a banker
honours a post dated cheque, he will not only lose statutory protection but will be
sued by the customer.
In the case of a stale cheque, when the cheque is more than three months
old, it is no more a cheque.
Payee
 Not clear
 Wrong person
When the payee is not clear or when the payee is a wrong person, the banker will not pay and has
every right to dishonour.
Amount - In words and figures differ.
When the amount given in words and stated in figure differs, the
banker will dishonour.
Signature - If the signature is not according to the specimen signature or
differs from the specimen, the banker should dishonour.
Endorsements - The endorsements appearing on the cheque should be proper and
if there is any defect in endorsements, the cheque will be
dishonoured.
Insufficient funds - If there are insufficient funds in the account and the cheque presented
is for a higher amount, the bank will dishonour the cheque and
mention the reason as “insufficient funds”.
Mutilated Cheque - Where the cheques are torn and are beyond recognition.
Smudged Cheque - Where the writing on cheque is unclear or smudged because of sweat
or water, the banker will dishonour such cheques.
Material Alteration - When a cheque contains alterations which are made without the
knowledge of the drawer or the banker, with an intention to
defraud both parties, the cheque will be dishonoured.
If overwriting or cancellation which are not approved by the drawer, with his full signature on the
cheque, at the place of overwriting. The cheque will be dishonoured.

Duty to Maintain Secrecy of Customer’s Account

The banker has an obligation towards customer to maintain secrecy about the status of
account. He should not reveal the secrecy of customer’s account in the normal course of
business. However, in the following conditions the secrecy of the customer’s account will be
disclosed.
i) Express or Implied condition
ii) Under compulsion of law
iii) In the course of banking business
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 iv) Disclosure in the public interest
v) Bankers among themselves.
i) Express or implied condition
 When customer has given in writing to the banker to reveal the secrecy of
customer, the banker may do so. This is Expressed condition
 When the customer acts as a guarantor for a principal Debtor, the banker has
to reveal the secrecy of the customer’s account to the guarantor. It is implied
condition
ii) Under Compulsion of Law
 Under Income Tax Act 1961, when the Income-Tax authorities demand for the
details of the customer’s account, the banker has to reveal.
 Under Foreign Exchange Regulation Act.
 Under Indian Penal Code, when any police official makes an enquiry.
 Under Gift Tax Act.
 Under RBI Act.
 Enquiries by Government, both State and Central.
 Under Banking Companies Act, the Central Government and Reserve Bank of
India can ask the banker about status of any account.
 Under Indian companies Act sec. 235, 237 and 251.
 Under sec. 4 of Banker’s Book Evidence Act. A banker can produce for any investigation,
the books, documents belonging to the customer.
iii) In the course of Banking Business
A bank, in order to protect its own interest, may have to reveal the secrecy of the
customer’s account.
The banker may disclose the state of his customer’s account in order to legally protect
his own interest. For, example- if the banker has to recover the dues from the customer or the
guarantor, disclosure of necessary facts to the guarantor or the solicitor becomes necessary and
is justified.
iv) Disclosure in the Public Interest

When a customer is amassing wealth by cheating the public and increasing the deposit
account with the banker it is the duty of the bank to reveal the same to the public. Otherwise
the banker will be held liable for abetting the crime.
v) Bankers among themselves can share information
Between the bankers as per the trade custom, information can be shared in their
own business interests. This is as per the custom of the trade.
It is an established banking practice to provide credit information about their customers
by one bank to another. The customer gives implied consent to this practice at the time of
opening the account.

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 Duty to render proper account of deposits made and withdrawn by
customer

 It is the duty of the banker to render proper account of deposits and withdrawals by the
customer by making entries in passbook and statement of account of customers.

 It is the duty of the customer to verify the entries in the pass book then and there and
inform the banker about the discrepancies, if any, shown in the pass book.Banker Customer
Relationship

Banker Customer Relationship

Sl. No Type of Transaction Bank Customer

1 Deposit account, CC (with credit balance) Debtor Creditor
2 OD, CC, Loan Account (With debit balance) Creditor Debtor
3 Collection of cheques Agent Principal
4 Sale or Purchase of Securities Agent Principal
5 Issuing/ Purchase of Draft by Purchaser Debtor Creditor
6 Payee of Drafts at paying Branch Trustee Beneficiary
7 Mail Transfers, Telegraphic Transfers Agent Principal
8 Complying with standing instruction Agent Principal
9 Providing various service to non Account holder Agent Principal
10 Cheques deposited pending instructions for Trustee Beneficiary
disposal thereof
11 Safe custody of Articles Bailee Bailor
12 Leasing of Locker Lessor Lessee
13 Mortgage of immovable property Mortgagee Mortgagor
14 Pledge of Securities /Shares Pledgee Pledgor
15 Hypothecation of Securities Hypothecate Hypothecator
16 Sale/Purchase of Shares etc Agent Principal
17 Maintaining Currency Chest (RBl's Property) Agent Principal

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BANK’S OBLIGATION TO MAINTAIN SECRECY OF ACCOUNTS
When a person opens an account in a bank he/she is entitled to a reasonable assurance that information
regarding the account remains a matter of knowledge only between the banker and the account holder. This
is because, it is one of the principal duties of the banker to maintain complete secrecy of the status of the
customer’s account. This obligation of the Bank to maintain secrecy continues even after the customer’s
account is closed. If the banker makes an unwarranted disclosure of the status of account of the bank’s
customer, the banker becomes liable to compensate the customer. However, the bank’s obligation of
keeping the secrecy of the status of the customer’s account is qualified and not absolute. There are certain
circumstances in which the banker is entitled or required to make disclosures about a customer’s account.
Let us understand the conditions under which a banker is justified in making disclosure.Disclosures
permitted by Law

(i) Under iaw: A Bank is justified to disclose any information about the customer’saccount when it is
statutorily required to do so under
(a) Income Tax Act, 1961(Section 131 & Section 133(6)
(b) Companies Act, 1956 (Section 235 andSection 237)
(c) Bankers Book Evidence Act, 1891 (Section 4)
(d) ReserveBank of India Act, 1 937 (Section 26)
(e)(1) Foreign Exchange Management Act1973 (Section 11)
(f) Gift lax Act, 1958 (Section 36)

(ii) Under express or implied consent of the customer: When an account is opened with the bank, there
is an implied contract between the customer and the Bank that the latter will not disclose information relating
to his account without the customer’s consent. If however, a customer permits, this information can be
disclosed. For example, the customer may permit giving information about his! her account to a prospective
guarantor, or, customer. It is necessary to obtain the customer’s consent before disclosing the information.
The consent can be expressed or implied.

(iii) Common courtesy among bankers: As per the practices/usages in the banking system (business) it is
customary to share information about customers among the bankers, that whenever a bank makes inquiries
with another bank, on matters such as proposed sureties or acceptors etc. An implied consent of the
customer is presumed to exist therefor. However, such information is kept confidential at both the ends and
adequate precautions should be taken while furnishing such information.

(iv) Disclosure in the bank’s interest: A bank can disclose information when it is essential to protect its
own interest, legally. For instance, if there is any dispute between the customer and a banker, regarding
balance standing in the account of the customer or if there is a loan default, then the bank will be justified in
revealing the information to the guarantor or to a solicitor for initiating legal proceedings in the court of
law.The sharing of information between a bank and its agent for collection purposes will fall under this head.
It is necessary that the information shared with the agent is exclusive and not to put to other uses. Therefore
the banks should take adequate care and due diligence in selecting the agents..

(v) Disclosure in Public/National interest: Banker may be required to make disclosure in the interest of
the nation and public at large. Public interest may be reckoned only according to the prevailing
circumstances.

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GARNISHEE ORDER
A Garnishee Order is an order issued by court under provisions of Order 21, Rule 46 of the Code
of Civil Procedure, 1908. The concept of ‘Garnishment’ has been introduced in civil procedure
code by the amendment Act, 1976 and is a remarkable piece of legislation. This term has been
derived from the French word ‘garnir‘ which means to warn or to prepare.
In simple words the garnishee is the person who is liable to pay a debt to a debt to judgment
debtor or to deliver any movable property to him. Besides Judgment Debtor and decree Holder,
Garnishee is a third person in whose hands debt of the judgment debtor is kept.
Garnishee Order is an order passed by an executing court directing or ordering a garnishee not to
pay money to judgment debtor since the latter is indebted to the garnisher (decree holder). It is an
Order of the court to attach money or Goods belonging to the judgment debtor in the hands of a
third person.
How a garnishee order works?
A default judgement is usually obtained by a creditor either when a debt has gone unpaid, you
haven’t been able to come to any agreement with the creditor about repaying the debt, or other
alternative debt collection avenues have been exhausted. If a garnishee order is made against
you, then your bank, financial institution, or employer will likely be notified rather than you.
The payment made by the garnishee into the court pursuant to the notice shall be treated as a
valid discharge to him as against the judgment debtor. The court may direct that such amount may
be paid to the decree holder towards the satisfaction of the decree and costs of the execution.
Features of the Garnishee Order
The bank upon whom the order is served is called Garnishee. The depositor who owes money to
another person is called judgement debtor. Features of the Garnishee Order are as under;

 Garnishee Order applies to existing debts as also debts accruing due i.e. SB/CD, RD/FD
Accounts.
 Garnishee Order applies only to those accounts of Judgement Debtor which have credit
balance.
 The relationship between bank and judgement debtor is of debtor and creditor. Bank is the
debtor of Judgement Debtor who is a creditor of the bank.
 Garnishee Order does not apply to money deposited subsequent to receipt of Garnishee
Order. It also does not apply to cheques sent for collection but yet to be realized. But if
credit was allowed in the account before realization with power to withdraw to customer,
Garnishee order will be applicable on this amount.
 Garnishee Order does not apply to unutilized portion of overdraft or cash credit account of
the borrower as no debt is due to judgement debtor. For example, if limit is Rs 4 crore and
outstanding is debit Rs 3 crore, Garnishee order is not applicable on the balance Rs 1
crore.
 Bank can exercise right of set off before applying Garnishee Order.
 Garnishee Order is applicable only if both debts are in same right and same capacity.
 Garnishee Order issued in a single name does not apply to accounts in the joint names of
judgement debtor with another person(s). But if Garnishee Order is issued in joint names, it
will apply to individual accounts also of the same debtors. When Garnishee Order is in the
name of a partner it will not apply to partnership account but when Garnishee Order is in
the name of firm, accounts of individual partners are covered.
 If amount is not specified in the order, then it will be applicable on the entire balance in the
account. However, if it is for specific amount, the cheques can be paid from the balance
available after setting aside the amount as mentioned in the Garnishee Order.
 Not applicable on fixed deposits taken as security for some loan.
 If loan given against fixed deposits, applicable on the amount after adjusting the loan.

Where neither the garnishee makes the payment into the court, as ordered, nor appears and
shows any cause in answer to the notice, the court may order the garnishee to comply with such
notice as if such order were a decree against him. The costs of the garnishee proceedings are at
the discretion of the court. Orders passed in garnishee proceedings are appealable as Decrees.

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ATTACHMENT ORDERS
Income Tax Authorities Issue Attachment Orders in terms of Section 226(3) of Income Tax Act,
1961. On receipt of this order, banker is required to remit the desired amount to income tax
authorities. An Attachment Order without mentioning the amount is not a valid order.
Attachment Order is different from Garnishee order in following respects:
1. Attachment order applies to money deposited in the account after receipt of order also till it
is fully satisfied whereas Garnishee order does not apply to subsequent deposits.
2. Attachment Order in single name applies to joint accounts also proportionately unless the
contrary is proved whereas Garnishee order in single name does not apply to joint
accounts. However, right of set off is available to bank before applying the order.
In case banker fails to comply with Attachment Order, it will be liable for the amount of order and
deemed as an assesses in default.
When both Garnishee Order and Attachment Order are received simultaneously, priority should be
given to Attachment Order.

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www.DesiLLB.com 15
Effect of ATTACHMENT
An Attachment is a mechanism established and embraced by the Supreme Court of Mauritius
whereby a creditor — the applicant — may have recourse to the intervention of the Judge in
Chambers to secure or recover the debt owed to him by the debtor.

In effect, a creditor is seeking to forbid a third party, also known as "the garnishee", from disposing
what the latter allegedly owes to the debtor. In simpler terms, if someone (the garnishee) owes
the debtor money, an Attachment will allow the creditor to ask the Judge in Chambers to
have it paid to the creditor instead. The Judge will also prevent the garnishee from
disposing the assets until the final determination of the claim by the creditor.(Effect of
Attachment)

An application for an Attachment Order is a conservative measure (because the garnishee is

essentially prevented from dissipating the seized assets) it ultimately results in payment to the
creditor by way of the sale of the seized assets.

Effect of Garnishee order

The word 'Garnish' is derived from an old French word 'garnir' which means to warn or to prepare .
It is to serve an heir with notice i.e. to warn of certain debts that must be paid before the person is
entitled to receive property as an heir.
Effect of Garnishee Order
A garnishee order is an order passed by an executing court directing or ordering a garnishee not to pay
money to judgment debtor since the latter is indebted to the Garnisher (decree-holder). It is an order of
court to attach money or goods belonging to the judgment debtor in the hands of a third person

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PAYMENT IN DUE COURSE
Negotiable Instruments Act

Section 10

 Any person legally responsible to make payment

 Must make the payment of the amount due
 In due course- with purpose of obtaining valid discharge against holder
ESSENTIALS

a) In Agreement with apparent tenure of instrument- on the face of instrument- intention

of parties
b) In good faith and without negligence- No ground- person to whom payment made- not
allowed to recieve
c) Person in possession of instrument- entitled as holder to obtain payment
d) No ground- Not entitled to amount stated
e) Payment made in money only

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 PAYING BANKER
Negotiable Instruments Act

Section 31

 Obligation of banker
 When cheque is presented for payment
 Banker should pay the cheque
 Bound to honor customer’s cheque
To the extent-
o Funds available
o No legal bar

Verify

1. Signature
2. Genuineness
3. Stop payment
4. Account holder not – Bankrupt, Deceased, Insane
5. Garnishee Order
6. Open or Crossed
7. Date
8. Material alteration
9. Balance
10. Endorsement

PROTECTION

 Payment in due course

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 COLLECTING BANKER
Collect instrument- For crediting customer’s account

VERIFY

a. Holder name
b. Branch name
c. Date
d. Amount in words and figure
e. Any cutting without signature
 Present to paying bank in due time
 Collect and credit proceeds to payee’s account
 Notice of dishonor to payee

PROTECTION

Section 131
o Good faith and without negligence
o Collection for customer
 Not stranger or non customer
o Act as an agent not holder
o Crossed cheques
 Open do not need collection
Consequences of Wrongful Dishonour
Cheques are utilized in nearly all exchanges such as re-payment of credit, installment of
compensation, bills, expenses, etc. An endless lion’s share of cheques are handled and cleared by
banks on every day premise. On the other hand, it is continuously prudent to issue crossed
“Account Payee Only” cheques in arrange to dodge its misuse.
A cheque is a negotiable instrument. Crossed and account payee cheques are not negotiable by any
person other than the payee. The cheques ought to be kept into the payee’s bank account. Legally,
the creator of the cheque is called ‘drawer’, the individual in whose support, the cheque is drawn is
called ‘payee’, and the bank who is coordinated to pay the sum is known as ‘drawee’. However,
cases of cheque bounce are common these days. Some of the time cheques bearing expansive sums
stay unpaid and are returned by the bank on which they are drawn.
DISHONOUR  OF CHEQUE
If the bank denies to pay the sum to the payee, the cheque is said to be dishonoured. In other words,
dishonour of cheque could be a condition in which bank denies to pay the sum of cheque to the
payee.
When a cheque is dishonoured, the drawee bank quickly issues a ‘Cheque Return Memo’ to the
banker of the payee saying the reason for non-payment. “The payee’s investor at that point gives
the dishonoured cheque and the notice to the payee. The holder or payee can resubmit the cheque
inside three months of the date on it, in case he accepts it’ll be honoured the second time”. Be that
as it may, on the off chance that the cheque issuer comes up short to form a installment, at that
point the payee has the correct to indict the drawer lawfully. The payee may lawfully sue the
defaulter / drawer for disrespect of cheque as it were on the off chance that the sum said within the
cheque is towards release of a obligation or any other risk of the defaulter towards payee. If the
cheque was issued as a gift, towards loaning a advance or for illegal purposes, at that point the
drawer cannot be arraigned in such cases.
 REASONS FOR DISHONOUR OF CHEQUE
 In case the cheque is overwritten.
 In case the signature is missing or the signature within the cheque does not coordinate with
the example signature kept by the bank.
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   In case the title of the payee is missing or not clearly written.
 In the event that the sum composed in words and figures does not coordinate with each other.
 On the off chance that the drawer orders the bank to stop installment on the cheque.
   In case the court of law has given an arrange to the bank to stop installment on the cheque.
  In the event that the drawer has closed the account some time recently showing the cheque.
   If the fund within the bank account is inadequately to meet the installment of the cheque.
 In case the account number isn’t specified clearly or is through and through absent.
  If the bank gets the data with respect to the passing or insanity or bankruptcy of the drawer.
  If any modification made on the cheque isn’t demonstrated by the drawer by giving his/her
signature.
  In case the date isn’t specified or composed inaccurately or the date specified is of three
months some time recently.

HOW TO AVOID DISHONOUR OF CHEQUE

 Know your balance: – Check your accessible adjust frequently. Utilize fund apps and content
messages together with your bank to get it when cash clears out your account.
 Keep a buffer: – Continuously take off a few additional cash in your checking account for
unexpected costs. That can assist you when require cash critically. That cash can offer
assistance after you forget about installment that hit your account. In case you continually
keep your account adjust over zero, you’re more likely to pay overdraft charges.
 Balance your account: – Continuously check your account adjust, store and withdrawals. In
case you adjust your account, at that point you’ll have the knowledge around your account
some time recently your bank does.
 Communicate to the payee: – If you compose a cheque and afterward on you realize merely
don’t have adequate sum in your account for installment, at that point you’ll be able contact
to the payee quickly let the payee know some time recently he store the cheque and make
other courses of action. This will spare time and cash for both of you.

LEGAL CONSEQUENCES OF  DISHONOUR OF CHEQUE

The Negotiable Instruments Act, 1881 is applicable for the cases of dishonour of cheque. This Act
has been amended many times since 1881.
According to Section 138 of the Act, “the dishonour of cheque is a criminal offence and is
punishable by imprisonment up to two years or with monetary penalty or with both”.
If payee decides to proceed legally, then the drawer should be given a chance of repaying the
cheque amount immediately. Such a chance has to be given only in the form of notice in writing.
The payee has to sent the notice to the drawer with 30 days from the date of receiving “Cheque
Return Memo” from the bank. The notice should mention that the cheque amount has to be paid to
the payee within 15 days from the date of receipt of the notice by the drawer. If the cheque issuer
fails to make a fresh payment within 30 days of receiving the notice, the payee has the right to file
a criminal complaint under Section 138 of the Negotiable Instruments Act.
However, the complaint should be registered in a magistrate’s court within a month of the expiry of
the notice period. It is essential in this case to consult an advocate who is well versed and
experienced in this area of practice to proceed further in the matter.

CONDITIONS
Lawfully, certain conditions have to be be satisfied in arrange to utilize the provisions of Section
138.
“The cheque ought to have been drawn by the drawer on an account kept up by him. The cheque
should have been returned or dishonoured since of insufficient funds within the drawer’s account”.
The cheque is issued towards release of a debt or legitimate liability.
After receiving the notice, in the event that the drawer doesn’t make the installment inside 15 days
from the day of getting the take note, at that point he commits an offense punishable under Section
138 of the Negotiable Instruments Act.

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PUNISHMENT & PENALTY
On getting the complaint, beside an affidavit and relevant paper trail, the court will issue summons
and listen the matter. In case found guilty, the defaulter can be punished with monetary penalty
which may be twice the sum of the cheque or imprisonment for a term which may be extended to
two years or both. The bank too has the correct to stop the cheque book facility and close the
account for repeat offences of bounced cheques.
If the drawer makes payment of the cheque sum inside 15 days from the date of receipt of the take
note, at that point drawer does not commit any offence. Otherwise, the payee may continue to
record a complaint within the court of the jurisdictional magistrate inside one month from the date
of expiry of 15 days endorsed within the take note.

Cross Cheque
The process referred to as Crossing of Cheques specifies a general instruction to a cheque
which is about to be deposited to a bank account. According to Section 123 of the
Negotiable Instruments Act, 1881 about Crossing of Cheques, the instruction stated above
defines that the amount specified in the cheque will be deposited directly unto the account
of the Cheque holder and will not be immediately delivered as cash to the holder over the
bank counter. In this article, we look at cross cheques in detail.

Reasons to Cross Cheque

 Crossing a Cheque provides precise instructions to a financial organisation
regarding the handling of funds.
 Crossed cheques are usually identified by drawing either two parallel transverse
lines either vertically across the cheque or on the top left-hand corner of the
cheque.
 Two or more words like ‘and company’ or ‘not negotiable’ may be placed between
the lines. While just drawing the lines with no words also would not alter the
purpose of the crossed cheque.
 With Crossed cheques, the cheque writers may protect the amount transferred from
being cashed by the unauthorized person or from being stolen.
 This format for Crossed cheques may differ between various countries in the nature
of its format or statements.
 Since the Crossed Cheques can only be paid through a bank account, the
beneficiaries transaction record may be traced later for further queries and
clarifications.

Types of Cross Cheque

General Crossing (Section 123)
As mentioned earlier, the general crossing of cheques means including some words in between
the two lines drawn which symbolizes a crossed cheque. This depicts that the bank on which it is
drawn shall not permit the amount of payment in any other banks. Hence, the payment can be
made only in the collecting bank.

General Crossing
Special or Restricted Crossing (Section 124)
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In the case of special crossing, the cheque bears the name of the bank, either with or
without the words ‘not negotiable’. This means that the payment can be made only to that
specific bank.

Special Crossing
Not negotiable crossing (Section 130)
This type of cheque crossing means that the cheque can be transferred but cannot be
negotiated. In such cases, the ‘cheque holder’ will bear the title of a transferor only.

Non- Negotiable Crossing

Amount Payee Crossing
The above term depicts that the amount cannot be paid in any other bank account apart
from the one mentioned in the cheque. Practicing Account payee crossing also ensures
that, the money is transferred to the bank account only and is not given in the form of
liquid cash.

Account Payee Crossing

NOTE: In certain payments such as treasury payments and Income Tax refund orders there
prevails a requirement of acknowledging for the receipt of the amount and the necessary
stamp is also required behind the refund order. Whereas, in the case of Crossing Cheque,
no official stamp registered under the Stamp Act is required.

Cheque Validity
The validity of a cheque is estimated to be within a period of three months from the date on
which it is drawn. After this period, it becomes stale, and it may result in the drawee bank
refusing to pay the amount. However, if the cheque has become obsolete due to the expiry

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of the period of validity, then it can be re-validated by the drawer.

Procedure of filling complaint and liability of dishonor of

Cheques

Introduction
In India, cheques are issued for a variety of transactions, the majority of which
are commercial dealings. It is common practice for business owners to issue post-
dated cheques to their distributors or service providers; moreover, it does happen
that a cheque gets dishonoured when delivered to the bank caused by a lack of
finances. Cheques are often used in roughly all payments, including loan
repayment, payment of fees, payment of bills, salary payment, and so on.
Regularly, banks process and clear the wide proportion of the cheques that come
through their doors.

If the sum of money of the cheque is given to the payee by the bank, the cheque
is deemed to have been honored by that bank. If the bank denies paying the sum
of money of the cheque, the cheque is deemed to be dishonoured and is returned
to the sender. As a result, a dishonoured cheque indicates that the bank has
refused to pay the sum of the amount of the cheque to the payee. Section 138 of
the Negotiable Instruments Act 1881 is intended to curb malpractice on the part
of the drawer by causing him or her to draw a cheque without adequate money in
his or her account managed by him or her in a bank and to provoke the payee to
respond on the cheque in the proper course of events.

What is a cheque
A cheque is considered to be a negotiable instrument. It is governed by Section
6 under the Negotiable Instruments Act of 1881. In the financial world, a ‘cheque’
is a bill of exchange drawn on a definite banker and not expressly stated to be
payable except on demand. It also involves a computerized picture of a
compressed cheque and a cheque in digital format. In layman’s terms, a cheque
is a paper that is drawn by one individual for the benefit of another individual to
whom he has consented to pay a specific amount of money within a specific time
frame. There are three parties to a cheque:

1. Drawer- The drawer is the individual who is responsible for issuing the
cheque.
2. Drawee- In the case of a cheque, the banker on whom the cheque is drawn
is indeed the person who receives the cheque.
3. Payee- The individual to whom the cheque is to be made payable.
The number of commercial transactions is increasing at an alarming rate. As a
result, it is hard for an individual to hand over liquid money to some other
individual. In such circumstances, a cheque serves as a means of transferring
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money from one individual to another, ensuring that the transfer of money is
secure and that both parties benefit from the savings in time that the cheque
provides. While there are numerous advantages of using a cheque: 

 Some protocols must be pursued when money is transferred through the

use of a cheque. A crossed cheque ensures that only the payee can obtain
the funds. 
 It also ensures that the drawer has a bank account; the cheque must be
given some obligations to the recipient (payee); and, in form of finance,
there must be adequate funds in the drawer’s bank account for the cheque
to be issued and not to be dishonoured due to inadequacy of funds. 
 Most pertinently, it ensures that only the payee can obtain the funds.

Dishonour of cheque
As the number of individuals conducting commercial transactions grows daily, the
consistency of retaining a positive bank balance has fluctuated in response to the
people’s monetary requirements. If an individual issues a cheque to another, it is
possible that he or she is not cognizant of the actual bank balance, and as a
result, the cheque may be rejected. In such cases, the drawer of the cheque is
provided a 30-day grace period to pay back the amount to the payee. However, if
the drawer does not agree to pay the amount within that time, the payee has the
alternative to file a lawsuit against the drawer seeking payment of the sum of
money of the cheque and also an amount of interest as remuneration for the
default induced by the drawer.

Cheques are deemed to have been honored when the payee’s bank transfers
payment of their portion of the cheque amount to the drawee bank. On the other
hand, when a bank refuses to pay the sum of the amount of a cheque to the
payee, the cheque is referred to as being “dishonoured.” A cheque may be
returned unpaid by the drawee bank for a variety of factors, one of which is
insufficient money in drawee’s checking or savings account. When a cheque is
returned unpaid, the drawee’s bank immediately issues a ‘Cheque Return Memo’,
which details the causes for the cheque’s non-payment. At this point, the payee
has the alternative of furthering legal claims for dishonour as soon as possible or
resubmitting the cheque for realization after receiving confirmation from the
drawer that the cheque will be honored the second time around. It is critical, after
all, that any legal action can be taken if the cheque is presented to the bank after
the validity period of 3 months or 90 days.

Reasons for the dishonour of cheque

In the following cases the cheque gets dishonoured:

 If there is an overwriting or if the signatures do not complement.

 If there is any reason to think about the authenticity of the cheque.

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  A discrepancy in the account number may even result in a cheque being
bounced or a cheque being dishonoured.

 The customer’s insanity, bankruptcy, and death as a result of providing a

cheque at the incorrect branch are all possibilities.
 The bank will dishonour the cheque if the drawer has requested the bank to
stop payment and not pay for the cheque already issued.
 If the payment is made to the bank after three months from the date which
is written on the cheque then the cheque will be dishonoured due to the
expiry of that period and this type of cheque is known as a stale cheque.
 When the government or the court will order the bank to freeze all the
accounts of that individual and thereafter the cheque pertaining to that
individual’s account will be dishonoured. 
 In case the drawer closes his account before a cheque is presented to the
bank then the cheque will be dishonoured. If the drawer doesn’t have
adequate funds to pay the amount mentioned in the cheque then the
cheque will be dishonoured. What happens when the cheque is dishonoured
by the bank
According to the Negotiable Instruments Act, 1881, the dishonour of a check is a
criminal offence, and the person in whose favor the cheque is issued can seek
both civil and criminal redress. An individual who has obtained a cheque in
exchange for services provided or for other obligations will incur financially if the
very instrument that guarantees to honor the payment in the mode of a cheque is
not honored. When a cheque is dishonoured, the law contains regulations that
ensure the payee is not left without recourse in form of money that he is lawfully
authorized to and emotional trauma that he has been subjected to, and he must
take specific measures, which involve sending a legitimate demand notice to the
drawer or filing a lawsuit if the drawer fails to honor the cheque after receiving
such a demand notice. dishonouring certain cheques has been made an offence
under Section 138 of Negotiable Instrument Act, 1881 punishable by
imprisonment for up to two years, a pecuniary fine, or both.  To put this into
impact, the Public Financial Institutions, Banking, and Negotiable Instruments
Laws (Amendment) Act, 1988, was passed, which amended the Negotiable
Instruments Act, 1881. The Negotiable Instruments Act was amended to include a
new Chapter VII, consisting of Sections 138 to 147. Sections 143 to 147 of the
Negotiable Instruments (Amendment) Act, 2002, have been incorporated into the
same Chapter.

According to Section 138, if an individual draws a cheque from an account

managed and maintained by the same individual with a banker with an intention
of the repayment for his debt or other liability to another individual from that
account wholly or partially, and then it is reverted by the bank unpaid either due
to the sum of money standing to the credit of that account had inadequacy of
money in the account or it exceeds the sum of money which had to be paid from
his account through an agreement signed between the bank and the individual,
such individual would be considered to have committed an offence and shall be
liable for that offence without any bias to any other provision of this act and shall
be punished for an extended term of 2 years of imprisonment, or with a fine
which can be more than twice the amount of the cheque, or shall be liable for
both imprisonment and fine.
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Essential ingredients to constitute an offence under
Section 138

Legally enforceable debt or other liability

If the drawer intended to use the cheque to discharge a legally enforceable debt
or other liability, the drawer should have issued the cheque to the payee in full or
in proportion. The repercussions of dishonouring a cheque when it is provided as
a gift to a private person, or as a charity or donation to a charitable organization,
or even as an unexpected cost or reward, are not addressed by Section 138 of the
Act, as determined by the Supreme Court in the case of Uplanche Mallikarjun and
Ors. v. Raj Kanti Vimala and Anr. (1997). Even if the cheque is issued as a safety
or as a discharge of liability as a guarantor, provisions of Section 138 of the Act
apply in these cases.

Presentment within three months

The cheque should have been addressed to the bank by the payee within the time
specified on the cheque. Normally, a cheque’s time frame is three months from
the date of issue; however, if a shorter period prescribed (for example, less than
three months) is stipulated on the cheque, that time frame is taken into
consideration.

Return of cheque due to insufficiency of funds

In this case, the cheque should have been given back to the drawer by the bank
because the sum of money standing to the credit of the account is inadequate or
surpasses the amount of money organized to be paid from that account. When we
say “money standing to the credit of the account,” we refer to the resources
available in the account that can be used to honor the cheque issued by the
drawer. Unless otherwise specified, the phrase “amount organized” relates to the
money that is currently in the drawer’s account plus any funds that have been
organized by the drawer with the banker, whether through an overdraft
agreement or other means. A stop payment will be considered to have been
dishonoured for inadequacy unless a valid reason for the stop payment can be
demonstrated.

What to do if cheque gets dishonoured

30 days notice to the drawer

As soon as a payee or an account holder learns that a cheque has been
dishonoured due to a lack of funds in the drawer’s account, he or she must send a
notice to that drawer requesting that the cheque amount be paid within 30 days
of receiving notice of dishonour from their bank. It is not possible to give notice

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under Section 138 of the Act verbally. The notice may be provided in any written
form, as well as by fax, email, or any other electronic means of communication.

Failure of the drawer to make payment within 15

days of receipt of notice 
The person who received the aforementioned cheque should have failed to make
payment within 15 days of receiving the notice from the payee, as stipulated in
the agreement. It is important to consider that the holder does not have access to
the cause of action at the time the cheque is dishonoured. When the holder
receives notice of a dishonoured cheque and transmits a notice seeking payment
of the cheque amount within 30 days of receiving notice of the dishonoured
cheque, and the drawer fails to pay the exact thing within 15 days of receiving
the said notice, the situation is then called for.

Filing of complaint with magistrate under Section

142
When an individual provides a cheque or payment that is not honored, the banker
notifies the individual that the cheque has been dishonoured. Following that, he
delivers a notice to the drawer, requesting that the amount of the cheque be paid
within 30 days of receiving notice of dishonouring the check. After the notice is
issued to the drawer, and if the payee does not make the payment within 15 days
of receiving the notice, an offence is committed under Section 138. The drawer’s
cause of action for filing a complaint emerges on the 16th day following receipt of
the notice, which is when the complaint is filed. Section 142 talks about the
cognizance of offences. 

Offence by companies
Everything about commercial transactions, especially the efficient and timely
governance of cheques as instruments, is dependent on the credibility and
sincerity of the parties involved in the transaction. There is no denying that a
bank’s failure to honor a cheque causes the payee irreparable loss, damage, and
discomfort and that the complete validity of business transactions conducted
within and out of the country suffers a sharp downturn as a result. As a
corporation, is an independent entity formed by law, a corporation operates
through its board of directors and officers, who are accountable for the overall
operation of the corporation. Criminal liability for cheque dishonour is mainly
imposed on the drawer company, but it may also be imposed on officers of the
company. Generally speaking, in cases that involve criminal liability, the rule
against vicarious liability applies, which means that no one can be held criminally
liable for the actions of another. This general rule, however, is subject to an
exception which makes the drawer vicariously liable under Section 138 of the
Negotiable Instrument Act, 1881, but the drawer will only be held liable if the
drawer itself is a corporation or a firm or an association of people, and at the
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commencement of that offence, all such persons were involved in that offence
and were held guilty for that offence under Section 138 of Negotiable Instrument
Act, 1881. Companies are subject to the provisions of Section 141 of the
Negotiable Instruments Act, 1881.

Punishment and penalty

The court will issue a summons and hold a hearing on the particular matter after
obtaining the complaint of the alleged crime, as well as an affidavit and all
relevant documentation. The defaulter may be penalized with a monetary
punishment that is twice the amount of the cheque in issue, or he may be
imprisoned for a term that can last up to two years, or he may be prosecuted with
a combination of the two. In addition, the bank has the authority to suspend the
defaulter’s access to his or her checkbook and to close the account if the defaulter
has a history of bounced checks. Unless the drawer fails to make payment on the
disputed cheque within 15 days of receiving the notice, the drawer is not
considered to have committed an offence. Alternatively, the payee may file a
complaint in the court of a jurisdictional magistrate within one month of the date
on which the 15 days specified in the notice was completed.

Dayawati v. Yogesh Kumar Gosain (2017)

The Delhi High Court’s decision in 2017 opened the door to a new avenue known
as the alternate dispute resolution mechanism for deciding crimes classified under
Section 138 of the Act that is criminally compoundable by nature. This decision
not only signaled a shift in the way the Act was dealt with, but it also signaled a
shift in the Indian judicial system. It went on to say that because the offences
listed under the Negotiable Instruments Act, 1881 are distinct from other criminal
offences, they can be given a priority to be remedied distinctly and more
expeditiously than other criminal offences.

Conclusion
When it comes to the crime of dishonouring checks, the element of motive, or
‘mens rea,’ which is a vital aspect of all criminal offences, is not pertinent in this
case. When cheques are dishonoured because there are insufficient funds in the
drawer’s account, Section 138 of the Negotiable Instruments Act makes it a
statutory offence, and the situations in which the dishonor occurred are
insignificant. However, the law only takes into consideration the fact that a check
has been dishonoured and does not take into consideration the numerous causes
that led to it. 

The dishonour of a cheque is one of the most common problems that parties
encounter when moving funds through negotiable instruments. Even though the
drawer was ignorant of the inadequacy of the funds in his account within a
recommended period, he will be held liable. However, the law itself offers them a
decent length of time to reimburse the money to the payee. The mistake that
occurs after such a time frame must be treated as a criminal offence because it

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entails the illegal intention of not repaying the money which is due to the party in
the first place. As a result, the law makes it evident that the parties signing a
cheque must be cognizant of the amount of money in their respective banks at
the time of signing.

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HOLDER&HOLDER IN DUE COURSE
HOLDER
Negotiable Instruments Act

Section 8

o Any person
o Right to
 Possession
 Receive or Recover
ESSENTIALS
o Right to possession
 Obtain possession by unlawful means (fraud)- Not holder
 Thief, finder- Not holder (Don’t have right to possession)
o Right to Receive or Recover
A steals cheque from B’s possession

 A will not be holder, B will continue to be holder

RIGHTS OF HOLDER

1. Right of possession
2. Right to receive or recover
3. Endorse
4. Cross
5. Convert blank into full
HOLDER IN DUE COURSE
MEANING

Section 9 Any person

o For consideration
o Become
 Possessor if payable to bearer
 Payee/Endorsee if payable to order
o Before amount become payable (before maturity)
o Without having sufficient cause to believe
 Any defect in title of person from whom he received title
 (Received honestly and in good faith)

ESSENTIALS
o For consideration
 Presumed, to secure free circulation of negotiable instruments
o Bearer- Possessor
o Order- Payee, Endorsee
o Before maturity
o Without notice and in good faith
 Honestly without doubt or suspicion about something wrong
RIGHTS

a. Better title
i. Free from all defects
b. Prior parties liable- Until instrument duly satisfied (till payment is made)
i. Can recover from any or all
c. Inchoate (incomplete) instrument- Rights of Holder in due course not affected
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 i. Originally incomplete
ii. Subsequent transferor completed sum greater than maker’s intention
d. Fictitious bill
i. Bill drawn on behalf of fictitious person and payable to his order
ii. Then acceptor not relieved from liability to holder in due course
iii. Provided- signature as drawer and endorser – in same hand writing
e. Unlawful Consideration, Means
i. A draws bill of exchange on B (lost in gambling)
ii. B accepts the bill
iii. A endorse to C for consideration, C takes in good faith
iv. B is liable
f. Without consideration- No obligation
i. But if any party transfer to holder in due course for consideration- Liable
g. Estoppel – against denying
i. Original validity
1. A makes PN to B, B endorse to C
2. On due date – dishonor- A can not say no amount due
ii. Capacity of payee to endorse
1. Promissory note- maker
2. Bill of exchange- order- acceptor
iii. Sign or capacity of prior party
1. No endorser can deny on suit by subsequent endorsee
h. Prosecution on dishonor- Section 138- complain

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ENDORSEMENT INDORSEMENT
MEANING
 Writing instruction
 Then putting signature (to approve it)

How is transfer done in negotiable instruments?

o Bearer instrument
 No need of endorsement, only delivery
o Order instrument
 Endorse and Deliver
DEFINITION
Negotiable Instrument Act

Section 15

 Holder
 Signs
 For negotiation( transfer)
 Face/ Back/ Paper slip annexed “allong”/ Stamp Paper
Endorser- who endorses- transferor

Endorsee- to whom it is made – transferee

ESSENTIALS

a. Purpose
b. Endorser- Holder,Maker
c. Signature
d. Delivery after endorsement

KINDS

a. Endorsement in blank
i. On the back signs only his name

ii. Effect- convert- order into bearer (negotiated by simple delivery)

b. Endorsement in full
i. On back
1. Signs
2. Puts name of person
a. To whom payment is to be done or
b. On whose order
ii. “Pay B or order”
1. Signature
iii. No particular words- any words that clearly show intention
iv. Effect- payment to endorsee or on his order
a. Restrictive Endorsement
i. Restrict right of endorsee’s further negotiation
ii. “Pay to C only”
b. Endorsement Sans Recourse
i. Sans Recourse means without recourse
ii. Endorser will not have any liability
iii. “Pay C sans recourse”

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 iv. “Pay C without recourse to me”
c. Conditional Endorsement
i. Condition
ii. “Pay B on his marriage”
d. Partial Endorsement
i. Only part of whole amount
ii. Section -56 – It is not allowed

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NEGOTIABLE INSTRUMENTS
 Negotiable means that can be transferred
MEANING
o Signed document
o Promise/ Guarantee- Payment of money
o To specified person
o On Demand/ at a set time

DEFINITION

Negotiable Instruments Act, 1881

Section 13

o Negotiable Instrument means

o Promissory Note/ Bill of Exchange/ Cheque
o Payable either
 To order
 Or to bearer

ESSENTIAL CHARACTERISTICS

a. In writing
i. Not oral
b. Transferable
i. Ownership transfer from one holder to another
c. Contract
i. To pay money
ii. Subject matter- Payment of money
d. Better title
i. Holder- Better title from person who has defective / no title (thief/finder)
ii. Provided acquired
1. Bona fide
2. For value (consideration)
3. Without notice of any defect in transferor’s title
e. Confer legal ownership on holder
i. Entitle to –
1. Negotiate it
2. Enforce claim in his own name
f. Payable to order or bearer
i. Order- To particular person
ii. Bearer- To holder/ possessor

KINDS
o Inland and Foreign Instruments
Section 11
 Drawn/Made in India and made payable in India
 Drawn/Made in India and Drawn upon any person resident in India
Section 12
 Drawn/Made outside India and made payable outside India
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  Drawn/Made outside India and Drawn upon person resident outside
India

o Ambiguous and Clean Instruments

 Section 17
 Ambiguous – Suspicion about nature- whether PN or BOE
 Holder may elect as either PN or BOE
Holder bound by his election
Thereafter cannot change opinion
o Bearer and Order Instrument
 Bearer
 Holder, Possessor- Payable to him
 Order
 To Particular person- Payable to him
o Time and Demand Instrument
 Time Instrument- Payable after a fixed time
 Demand Instrument- Payable immediately on demand
o Open and Crossed Cheques
 Open cheque
 Not have 2 transverse parallel lines
 Paid at the counter
 Crossed cheque
 Have 2 transverse parallel lines
 Not paid at the counter
 Amount transferred to account
DISHONOR OF NEGOTIABLE INSTRUMENTS

DISHONOR
 Failure to honor a negotiable instrument
 Loss of honor, respect
 Not suitable to realize funds
TYPES
1. By non acceptance
2. By non payment
By non acceptance
o Only Bill of Exchange (when they are presented for acceptance)
o Not accepted within 48 hours from presentment
o More than one drawee, accept by all must
o Drawee- fictitious
o Drawee- untraceable after normal search
o Drawee- not competent to contract
o Drawee- Death, Insolvency
o Qualified/Conditional acceptance- Holder may deem as dishonor
o Effect- Holder has right to sue all parties
By non payment
o Defaults or refuse to pay
o Promissory Note- Maker, Bill of Exchange- Acceptor, Cheque- Drawee
o Effect- Other parties- charged with liability
Notice

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 o Notice should be given within reasonable time
 Whom holder wants to make liable
o If no notice
 All discharged
 Except maker, acceptor, drawer (no notice required, they are principle debtor)
o Objective
 Inform, Warn
Dishonor by Insufficient Funds
o Criminal Liability (Sections 138 to 142 of Negotiable Instruments Act)
o England- only civil liablity
o France- dishonor more than once, 5 year prohibition to draw

PROMISSORY NOTE
DEFINITION

Negotiable Instruments Act

Section 4
 Instrument
 In writing (not bank note or currency note)
 Containing unconditional
 Undertaking to pay
 Certain sum of money
 Only to certain person / to the order of certain person/ bearer
 Signed by the maker
ESSENTIALS
a. In writing
i. Not oral
ii. Can be by pencil, ink, print, type, photocopy
1. Or other modes of representing, reproducing words in visible form
iii. No particular form
1. Word ‘promise’ not necessary
2. Language used clearly show intention to give undertaking to pay
b. Undertaking to pay
i. Express promise to pay
1. ‘I shall pay Rs.500 on demand’
2. ‘Rs. 500 to be paid on demand’
ii. Not mere acknowledgement of indebtness without promise to pay
1. ‘A, I owe to you Rs. 500’ – Not promissory note
2. ‘I am accountable to you’, ‘ I am bound to pay’- No
3. ‘I am liable to you’- No
c. Unconditional
i. Not subject to any condition
1. ‘on winning the case’, ‘on arrival of truck’- No
2. ‘Promise to pay if X pays me’- No
d. Certain Amount
i. Rs. 400- Yes
ii. Some money, all other sum, Rs. 400 and all fines- No
e. Money only
i. Something other than money- No
ii. Something in addition to money – No
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 1. ‘Pay money and party’- No
iii. Section 18
1. If amount in both words and figures
2. In case of discrepancy
3. Amount in words will prevail
f. Parties- Certain
i. Reasonable certainity
1. Name, Holder of office (like Chairman)
ii. If payable to bearer
1. Certainty requirement not apply
2. But only RBI, GOI can issue Notes payable to bearer (in definition)
3. They are Bank notes/Currency notes
4. Similar/ At par with PN but not PN
g. Signed by Maker
i. Agent also (if authority to sign)
ii. Illiterate – Thumb impression
h. Stamped
i. Without stamp- valid
ii. With stamp- binding
iii. Stamp from beginning – not necessary
iv. Can be made binding by paying required stamp with penalty

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 BILL OF EXCHANGE
DEFINITION
Negotiable Instruments Act
Section 5
o Instrument
o In writing
o Containing an unconditional
o Order
o Directing a certain person
o To pay a certain sum
o Of money
o Only to a certain person/ order of certain person/ bearer of instrument
o Signed by maker

PARTIES

Three parties

1. Drawer
2. Drawee
3. Payee

ESSENTIALS

a. In writing
b. Unconditional
c. Order to pay
i. May be in form of request
ii. Ruff Vs Webb
iii. “Mr. Nelson will much oblige Mr. Webb by paying Ruff or order, 20 guineas”
iv. Lord Kenyon-“ Language of draft- being very polite- Does not destroy order to
pay”
d. Parties- Certain
i. Named or indicated with reasonable certainty
e. Certain sum of money
i. Amount certain
ii. Payment of money only
f. Signed by drawer
g. Stamped
i.

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DIFFERENCE BETWEEN

PROMISSORY NOTE BILL OF EXCHANGE

Parties Two Three

Primary liability Maker Drawee(Maker- Secondary)

Promise Order

Acceptance for privity

No Yes, of drawee

Direct relationship

Maker-Payee Acceptor- Payee

Dishonored Non payment Non payment, Non acceptance

Protest Not required Yes necessary

Notice to other parties

Not required Yes

Debtor-Creditor relationship

Maker-Payee Drawee-Drawer

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 CHEQUE
DEFINITION
Negotiable Instruments Act

Section 6

Cheque is a

 Bill of Exchange
 Drawn on a specified banker i.e. Drawee must be a banker
 Always payable on demand
ESSENTIALS
a. In Writing
b. Order
c. Unconditional
d. Money only
e. Parties- Certain
f. Signed
g. Drawee – Banker
h. Always payable on demand
PARTIES
Three parties-
1. Drawer
2. Drawee- always banker
3. Payee- who is to receive payment
TYPES
Bearer Cheque
 Person who carries the cheque to the bank
 Has the authority to ask the bank for encashment.
 Used for cash withdrawal.
 Endorsable.
 No kind of identification is required for the bearer
 Example- Cheque has been signed by A (drawer) and the payee for the cheque is
B. B can either go to the bank himself or can send a third person to get
encashment for the cheque. No identification shall be required for the bearer’s
name.
Order Cheque
 Cannot be endorsed
 Only the payee, whose name has been mentioned in the cheque is liable to get
cash for that amount.
 The drawer needs to strike the “OR BEARER” mark as mentioned on the cheque
so that the cheque can only be encashed to the payee.
 Example- A cheque has been signed with the name of B, then only the payee
can visit the bank to get an encashment for the same for a order cheque.
 Payee’s identity may be cross-checked by the bank before encashing the sum of
money.

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Cross Cheque
 No cash withdrawal can be done.
 The amount can only be transferred from the drawer’s account to the payee’s
account.
 Any third party can visit the bank to submit the cheque.
 The drawer must draw two lines at the left top corner of the cheque.
Account Payee Cheque
 Amount shall be transferred directly to the payee’s account number.
 Two lines are made on the left top corner of the cheque, labelling it for
“A/C PAYEE”.
Stale Cheque

 In India, any cheque is valid only until 3 months from the date of issue.

Post Dated Cheque

 If a drawer wants the payee to apply for withdrawal or transfer of money after
the present date
 Then he/she can fill a post dated cheque.
Ante Dated Cheque
 If the drawer mentions a date prior to the current date on the cheque
Self
Cheque
 If the drawer wishes cash for himself

 He can issue a cheque where in place of the Payee’s

name he can write “SELF” and get cashment from the
branch where he owns an account.
Traveler’s cheque
 Can be used when a person is travelling abroad where the
Indian currency is not used.
Mutilated Cheque
 Cheque reaches the bank in a torn condition
 If the cheque is torn into two or more pieces and the
relevant information is torn, the bank shall reject the
cheque and declare it invalid, until the drawer
confirms its validation.
 If the cheque is torn from the corners and all the
important data on the cheque is intact, then the bank
may process the cheque further
Blank Cheque
 Cheque only has a drawer’s signature and all the other
fields are left empty

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SOCIAL CONTROL ON BANKS
MEANING
o “Additional control on banks”
o For restricting
 Alleged mismanagement
 Indiscriminate advance to
 Large and medium scale business houses
OBJECTIVE
o Management- Structural Changes
o By delinking nexus between big business houses and big commercial banks
NEED
o Help Priority Sector which was ignored
o Priority Sector- Agriculture, Small Scale, Exports
EXTENDED
oBanking Regulations Act amended in 1968 for social control
oBut despite social control
 Weaker sections neglected, not provided finance
 Restrictions flouted, observed only in form
o Failed in achieving desired goal
NATIONALISATION
o Govt. Of India setup NCC (National Credit Council)
o NCC placed report to GOI
o Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970- Passed
o Result- Major Indian Banks – Nationalised
 Important event in free India
o NCC dissolved
SUCCESFUL?
o Goal- Channelise credit to priority fields- agri, small scale, exports
 Rural banking
o Bank Officers Confederation Vs Union of India and Ors.
 Object of nationalisation- render the largest good to the largest number of
people
o Over years- most of eminent persons felt that both measures have not been favorably
put in practice to achieve desired goal.

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BANKING REGULATION ACT
BANKING COMPANIES ACT
o BCA 1949 renamed as BRA 1949 in 1966
MAIN OBJECTIVE
o Consolidate and Amend
o Laws relating to Banking Companies in India
NEED
o Check- Power abuse by persons controlling some banks
o Safeguard- Depositors and country’s economic interest
o Provide machinery- Liquidation Proceeding- Expedite, Speedily terminated
MAIN PROVISIONS
o Section 5 and 6
 Definition of Banking and Banking Companies
o Section 10
 Chairman, Director, Managing Agents- Their powers
o Section 10 A, B, BB, C
 Impose social control on Banking Companies except SBI and Nationalised Banks
o Limit shareholder’s voting right
 Restrain control over management
o Section 10
 Loans, Advances- Restrictions
o Section 21
 RBI’s Powers
 To control advances
o Interest rates – Not under Court’s scrutiny
o Section 22
 Licensing
o Section 23
 Branches- Opening and Transfer
o Cash Reserve, Reserve Fund – Maintenance
Section 34
 Maintain percentage of liquid assets in different forms
o Submit returns (monthly/others) to RBI
o Provisions regarding
 Audit, Inspection, Suspension, Winding up, Amalgamation
o Central Govt.- Power to acquire
o Prohibit
 Employee’s certain activities- strike, demonstrations- punishment
o Penalty
 Banking companies default
o Section 35 A
 Banking Ombudsman Scheme,1955
 Redress customer’s grievances against commercial banks.

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 RESERVE BANK OF INDIA
POWERS AND FUNCTIONS
UNDER

1. RESERVE BANK OF INDIA ACT 1934

2. BANKING REGULATION ACT 1949
UNDER RBI ACT 1934
o Currency notes issue
 Exclusive power
 Signature of Governor
 Except one rupee note or coin
 Central Govt. Issue- Finance Secretary Signs
o Banker to Government
 Transact Government business
 Exchange
 Remittance
 Other banking operations
o Banker’s Bank
 Keep deposits of banks
 Financial assistance to banks
o Control over banks
 Controller, Supervision
 License issue, suspend
 Inspect books/ accounts
 Give directions
 Remove management
o Controller of Credits
 Volume of credit- Created by Banks
 Control Inflation
 Ensure price stability
 Money supply
 Cash reserve ratio, SLR, Bank Rate
o Compliance of Statutory Reserve
 Bank obliged to keep a cash reserve called statutory reserve with RBI
o Power to collect information
 Collect credit information from banking companies
o Power to maintain currency value
 RBI- Custodian of Forex Reserve
 Power to regulate Forex transactions under FEMA
o Monetary controller of country
 Use powers of CRR, SLR, Bank Rate, Moral Suasion
o Other Developmental and Promotional Functions
 Encourage banks
 Rural, Semi Urban Branches, to reduce dependence on money lenders
 Discount and Finance House of India Ltd
 Provide security to depositors
 Establish Deposit Insurance Corporation
 Help establish Financial Corporation to provide credit to agri sector
 Promote RRBs- To extend banking facilities to rural area
 Establish EXIM bank- Finance and support to exporters

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 RBI POWERS AND FUNCTIONS
UNDER BANKING REGULATION ACT

a. Section 17
i. Power to maintain Reserve fund
b. Section 18
i. Power to maintain Cash reserve
c. Section 20
i. Terms of Loans and Advances
ii. Guidelines- Terms, Conditions, Recovery, Interest Rate
d. Section 21 A
i. Interest rate can not be under scrutiny of courts
e. Section 22
i. License- grant, cancellation to banking companies
f. Section 23
i. Business place of banking companies
ii. Prior permission- to open new or transfer existing
iii. Section 24 Maintain assets in gold securities, certain percentage
g. Section 27
h. Compel submission of monthly returns, accounts, balance sheet etc
i. Section 35 (1)
i. Inspection ( on Central Government direction)
i. Section 35 A
i. Give directions
1. In public interest
2. Interest of Banking policy
j. Section 36
i. Further powers and functions
1. Caution / Prohibit against any transaction
2. Assist in amalgamation of Banking Companies
3. Financial Assistance- Loan, Advances
k. Control over management
i. Through various sections
l. Section 36 A
i. Central Government after consultation with RBI – May acquire
ii. If satisfied that banking company
1. On more than one occasion –failed to comply directions
2. Managed in manner – detrimental to depositors
3. And
4. In depositor’s interest
5. Banking policy interest
6. Better provision of credit
m. Suspend, Windup
i. Suspend
1. Actions , proceedings against banking company
ii. Winding up
1. The End
2. Pay debts, distribute any surplus among members
n. Reconstruct, Amalgamation of Banking Companies.

Special Customer in Bank

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INTRODUCTION
The term 'customer' of a bank is not defined by law. Ordinarily a person who has an account in a
bank is considered its customer. There is no statutory definition of “customer”, and so one has to
refer the decisions of the courts in order to discover the principle which determines whether or not
a person is a customer. In the United States, customer means, 'any person having an account with
a banker or from whom a bank has agreed to collect items and includes a bank carrying an
account with another bank'.[1]The statutory protection under section 131 and 131A of the
Negotiable Instruments Act, 1881, is available to a collecting banker only if the banker inter alia
receives payment of a cheque or a draft for a customer. Though a customer is a very important
person for a bank, he appears only once in law of Negotiable Instrument.
The following are some examples of special types of customers:
• Married women
• Lunatics
• Minors
• Illiterate Persons
• Joint Hindu Family
• Partnership
CHAPTER I Special Classes of Customers MINOR
A person under the age of 18 years is years is a minor; if a guardian of his person or property or
both has been appointed by a court or if the superintendence of his property or both has been
assumed the age of 18 years, he remains minor till he completes the age of 21 years.[7] According
to the Indian Contract Act, 1872, a minor is not capable of entering into by a minor is void. The
banker should, therefore, be very careful in dealing with a minor and take the following
precautions:[8]
OPENING THE ACCOUNT
The banker may open a savings bank account, not a current account in the name of a minor since
in case of an overdraft the minor does not have any personal liability. The savings bank account
may be opened in any of the following ways:
• In the name of the minor himself.
• In the joint names of the minor and his/her guardian.
• In the name of guardian in the following way “ABC, natural guardian of XYZ”. Section 26 of
Negotiable Instruments Act provides that a minor may draw, endorse, deliver and negotiate a
negotiable instrument. In case of the minor can operate the account only jointly with his or her
guardian while in case of the account is to be operated by the guardian on behalf of the minor. In
cases the minor must have at least attained the age of 12 years and should be in a position to read
or write English, Hindi or Regional language.[9]
DATE OF BIRTH
At the time of opening of the account of minor, the bank should record the date of birth of the
minor as disclosed by his or her guardian.
DEATH OF THE MINOR GUARDIAN
In the event of death of a minor the money will be payable to the guardian. In case the guardian
dies before the minor attains majority and the account is a joint account or to be operated by the
guardian only, the money should be paid by the bank to the minor or attaining majority or to
some person appointed by the court as his guardian.
MINOR AS A PARTNER
A minor can be admitted to the benefit of partnership with the consent of all the partners but he

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will not be liable for the losses or debts of the firm. Within six months after majority he should
repudiate the liability as partner otherwise he will be liable as a partner.[10]
PROVISIONS REGARDING LEGAL GUARDIANSHIP OF A MINOR
• Natural guardian
• Testamentary guardian
• Guardian appointed by the Court The first two types of guardians are governed by the provisions
of the Hindu Minority and Guardianship Act, 1956, whereas a guardian is appointed by a court
under the Guardians and Wards Act, 1890.
RESERVE BANK'S DIRECTIVES
Reserve bank of India has advised the banks to allow opening of minors accounts with mother as
guardian. Thus, banks are now permitted to open account of minor in the guardianship of the
mother, even if the father of the minor is alive.[11]
CHAPTER II
MARRIED WOMAN
A married woman is competent to enter into a valid contract. The banker may, therefore, open an
account in the name of a married woman. In case of a debt taken by a married woman, her
husband shall not be liable except in the following circumstances:
• If the loan is taken with his consent or authority; and
• If the debt is taken for the supply of necessaries of life to the wife, n case the husband defaults in
supplying the same to her.
The husband shall not be liable for the debts taken by his wife in any other circumstances. The
creditor may in that case recover his debt out of the personal assets of the married woman.[12]
While granting a loan to a married woman, the banker should, therefore, examine her own assets
and ensure that the same are sufficient to cover the amount of the loan.
PARADANASHIN WOMAN
A paradanashin woman observes complete seclusion in accordance with the custom of her own
community. She does not deal with the people, other than the members of her own family. As she
remains completely secluded, a presumption in law exists that:
• Any contract entered into by her might have been made with her free will and with full
understanding of what the contract actually means.
• The same might not have  been made with her free will and with full understanding of what the
contract actually means.
The banker should, therefore take due precaution in opening an account in the name of a
paradanashin woman. As the identity of such a woman cannot be ascertained, the banker
generally refuses to open an account in her name.
ILLITERATE PERSONS
Illiterate persons cannot sign their names and hence the bankers taken their thumb impressions as
a substitute for signature, and also a copy of their recent photograph. The application from and
the photograph should be attested by an approved witness. For withdrawing money, he must
attend personally and affix his thumb impression in the presence of an official of the bank, for the
purpose of identification. Auchteronis Co. vs. Midland Ltd.[13] In this case the court held that a
bank does not owe duties to third parties who are not its customers. Certainly the mere fact that a
bank owes a duty to its customer in connection with a transaction does not mean that it owes a
duty to its customer in connection with a transaction does not mean that it owes a parallel duty to 
third person who may also be interested in the transaction.
LUNATICS
The banker should, therefore, not open an account in the name of a person who is of unsound
mind. But if a banker has discounted a bill duly written, accepted or endorsed by a lunatic he can
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realize the money due on the same from such person except in the circumstances where it is
proved that the banker was aware of the lunacy of the person concerned at the time he
discounted the bill. The banker should suspend all operations on the account of a customer as
soon as he receives the news of his lunacy till he gets the proof of his sanity or is served with an
order of the court. In the case of Shanti Prasad Jai v. Director of Enforcement Exchange Regulation
Act.[14] High court cases in India, it has been repeatedly held that the banker and customer
relationship in respect of money deposited in the account of  customer with the bank is that of
debtor and creditor.

DRUNKARDS The contracts entered into will be valid only if the parties to them are of
sound mind, in full possession of their faculties at the time of making the contracts. A
drunkard is disqualified from entering into a contract when he is incapable of
understanding the implications of the due to the effect of the liquor. In India the contract
by a drunkard is vold. The banker must be very careful. Some may, improperly induce a
drunken person to sign on a cheque taking undue advantage of his drunken state. The
banker will be held liable, it should be proved in the court that the person was so drunk as
to be unable to know that he was doing.
If a customer tenders a cheque, in a drunken state for which he demands payment the
banker would be advised to have a tiness to the signature and to the payment of the
amount.
JOINT ACCOUNTS A banker can open a joint account upon the receipt of an application
signed by all the persons interested in the account. While opening a joint account, the
banker must get a clear mandate in writing containing instruction at to how the account is
to be operated. Generally, a more authority given to draw money on joint a account does
not extend to with drawal of safe custody or to overdraw the accounts.
A banker should get clear instructions as to whether all of them or any one of them can
draw on the account. The general principle of law regarding joint debts by which a debtor
can pay to one of several joint creditors is not applicable to debts due from a banker to his
customers. Without the consent of the other joint deposit holders, a banker cannot make
payment to any one of them. The authority to draw on joint account would be
automatically revoked on the insanity or insolvency or the death of the person giving
authority.
The banker must have clear instruction as to whether the authorised person have the right
to overdraw the joint account. If authority to overdraw the joint account is given it is very
important for the banker to establish several liability also. Then only the banker can have
claim against all joint account holders individually apart from a single claim against all of
them. If shares standing in the join names are deposited by way of security, the transfer
forms must be signed by all those persons.
It is always better for the banker to have clear instruction as to what to do in the event of
the death of one of joint holders. Generally, on the death of one of the joint account
holders, the survivor is entitled to the whole of the amount. The banker is not answerable
to the legal representatives of the deceased.
The manduate should also make clear, whether withdrawal of securities for safe custody
on joint account is also included in the authority given. The full title of the account should
appear in the banks9 books as well as one very cheque drawn on such an account.
A common instance of a joint account is that of a husband and wife. In case of death of
one of them. If the banker have clear instructions for the payment of the amount to the

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survivor, he can do so.
If the representatives of the deceased do not interfere, the banker can pay the amount to
the survivor. In case of dispute, the court will decide the matter by taking into account he
intention of the parties is opening the joint account. If the intention is to provide for the
protection of the wife, then the rule of survivorship is applicable Foley Vs. Foley. If the
intention is to provide for the convenience of the husband the doctrine of survivorship is
not applicable. The amount should be transferred to the estate of the deceased husband
and not to widow (Marshall Vs. Cratwell). 

CHAPTER III
JOINT HINDU FAMILIES
The concept of joint Hindu Family is recognized by law. A business, according to law is a distinct
heritable asset. Where a Hindu dies, leaving a business it passes on the heirs. If he leaves male
issues it descends to them and the property becomes joint Hindu Family property. The members
of the family are called co- parceners and the eldest male member is the manager or the karta.
When an account in the name of the JHF is opened all the adult co- parceners are to sign the
account opening form, even though the karta would operate on the account. In addition, the
bankers also obtain a letter of undertaking signed by all the adult co- parceners stating that the
business carried on by the family through births and deaths will be advised to the banker. If the
business is ancestral, the co- parceners are liable to the extent of their share in the family property,
whereas if the business is not ancestral, co- parceners will be personally liable for the family from
the bank.
The main problem in dealing with a JHF arises in respect of loans. In the JHF governed by
mithakshara law, all the members acquires a right in the property by birth and this right starts from
the date of conception in the womb and so there is always the danger of a loan being repudiated
by a  member who was not even born on the date of the transactions. The burden of proving this
necessity lies on the banker and the banker has to not only prove the legal necessity, but also
prove that he made reasonable inquiries and was satisfied as to the existence of the legal
necessity.
To avoid these and several other difficulties, some banks requires a Hindu customer opening an
account, to furnish a statement to this effect that the money deposited is his self acquired
property and not that of JHF.
• The account should clearly indicate that it is a JHF.
• The JHF letter should be signed by all the co- parceners.
• The letter should clearly indicates the powrs of the karta.
• All co- perceners should sign the documents for loans.
• Death/Lunacy/Insolvency of co- perceners does not dissolve the JHF. It continues till partition of
property.
PARTNERSHIP
A bank should take the following precautions in the course of having business dealing with the
firm: • The banker should open an account in the name of partnership firm only when one or more
partners make an application to the effect. • The bank should ask for a copy of the partnership
agreement and thoroughly acquaint itself with its clauses. • The banker should take a letter signed
by all the partners containing the following: • The name and address of all partners • The nature of
the firms business • The names of the partners authorized to operate the account in the name of
the firm. • The banker should not credit a cheque in the firms name to the personal account of a
partner without enquiring from other partners.[16] In the absence of any contract to the contrary,
a partnership firm stands dissolved on the death of a partner. In case the firm continues to carry
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on the business, the estate of the deceased is not liable for any act of the firms after his death.
RECOMMENDATIONS AND SUGGESTIONS The present discussion highlights the legal position of
the special cases of a bank's customer and the necessary precautions that a prudent banker should
take while dealing with them. A bank account may be opened by any person who can legally enter
into a valid contract and applies to the bank in the proper manner i.e., undertakes to abide by the
bank's procedure and stipulated terms and conditions. Some persons like the minors, drunkards,
lunatic, and insolvents are not competent to enter into valid contracts. Thus requiring extra care to
ensure that their accounts are conducted in accordance with the provisions of their respective
charters.
CONCLUSION The customers of banks consist of millions of private individuals, hundreds of
thousands of small businesses some formed as private limited companies the majority being sole
traders or partnerships. Some persons like the minors, drunkards, lunatics and insolvent not
competent to enter into valid contracts. Some other persons like agents, trustees, executors, etc.
who act on behalf of others, have limitations on their powers. Thus requiring extra care to ensure
that their accounts are conducted in accordance with the provisions of their respective charters.

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